(W6) Corporate Financing

What are internal sources of funding?

• Retained Earnings: Profits the business kept instead of paying dividends

What are external sources of funding?

• Debt-financing: Borrowing money (E.g. Bank loans, bonds)

• Equity financing: Raising money by sellings shares to investors

What is Venture Capital?

• A type of equity financing provided to early-stage, high potential companies, especially startups

• Venture capitalists take on high risk in exchange for the chance of high returns if the company becomes successful

What is staged financing and why is it done?

VC funding is usually provided in rounds, with each round bringing in more money as the company grows

• Keeps entrepeneurs accountable

• Reduces investor risk

• Valuation adjustments

What are Initial Public Offerings (IPOs)?

• First-time issues of stocks by private firms going public

• Many IPOs are a mixture of primary and secondary offerings

What are primary offerings?

• New shares are sold for the first time to raise additional cash for the company

What are secondary offerings?

• The existing shareholders decide to cash out by selling part of their holdings

What are the benefits of going public?

• Access to a larger pool of equity capital

• Stock market provides a market value for the firms stock

• Liquidity for original owners and early investors

• Enhanced visibility and credibility

What are disadvantages of going public?

• High costs (Legal, accounting, underwriting fees)

• Public disclosure requirements

• Pressure from shareholders

• Reputation cost of unsuccessful IPO

How is an IPO price set?

• Firm fundamentals

  • Revenue, growth, profitability, business model

• Comparable companies

• Market conditions

  • Bullish vs Bearish market

• Investor demand

  • Revealed during the book-building process

What are follow-on equity offerings?

• Issued by public companies after IPOs

• Raise more funds for:

  • Expansion or R&D

  • Acquisitions

  • Paying down debt

What are private placements?

• Sale of securities to a limited number of investors without a public offering

• Investors are typically institution such as pension, funds, insurance companies

What is debt financing?

Raising funds by borrowing with a promise to:

• Pay interest

• Repay principal at maturity

What are key features of debt financing?

• Does not dilute ownership

• Creates fixed obligations

• Increases financial leverage

What are different forms of debt?

• Short-term vs Long-term maturity

• Fixed-rate vs floating-rate debt

• Domestic vs foreign-currency debt

• Senior vs junior

• Straight vs convertible bonds